- Bullish unusual options activity potentially favors General Motors.
- Though the trade itself is risky for participants, market makers have lower confidence in how events may transpire.
- For speculators, GM stock might be worth looking into.
For anyone shopping for a new (or new-to-them) vehicle, the retail experience is unfavorable to say the least. Unfortunately, for consumers who desperately need another ride, the bid to a fresh set of wheels is downright brutal. As the Associated Press declared, high prices and low inventory represent the new paradigm.
While big business is unlikely to court much public sympathy, it hasn’t been a cakewalk for automobile manufacturers either. While the post-COVID-19 ecosystem fundamentally bolsters the potential for higher profitability, supply chain disruptions and the soaring rate of inflation imposed significant challenges to demand fulfillment. Just ask American automotive icon General Motors (GM).
On a year-to-date basis, GM stock has tanked more than 47% of market value. In comparison, the benchmark S&P 500 is down a little over 20% during the same period. While some automakers fare better than others – notably, Toyota (TM) is down “only” 16.5% YTD – it’s overall an ugly sector.
Nevertheless, unusual options activity from the July 1 session appear to favor the speculative bullish case for GM stock. Rather than a mere blind wager, there could be some substance here for those who wish to swing for the fences.
Bold Bet for GM Stock
Although not the most unusual transaction in the derivatives market, GM stock stood out since the underlying business is inextricably tied to consumer sentiment. Without strong conviction that the public at large can handle a potential incoming recession, bullishness in General Motors wouldn’t make much sense.
Nevertheless, traders piled into the $55 call options for GM stock, featuring an expiration date of March 17, 2023. With over 250 days till expiration, the timeline implies more of an investment thesis rather than a quick trade. Volume for the transaction was 7,530 contracts against an open interest reading of 265.
What’s particularly interesting, though, is the bid-ask spread, which is 15% as a percentage of the midpoint price (40 cents) – a rather high figure compared to many other transactions. Inherently, traders can determine that this particular contract has lower liquidity, meaning that there are fewer buyers and sellers that can meet at a closer price.
As well, it’s important to understand the market maker’s role in the options arena. Usually, market makers attempt to keep the delta – or the estimate of how much an option’s value may change given a $1 move in the underlying stock – as close to zero as possible. For competitive reasons, these specialists will facilitate tight bid-ask spreads for reasonably predictable underlying stocks.
However, that’s not the case for GM stock. Apparently, market makers have little confidence in providing a fair assessment of any derivative contract, thus the wide spread.
Not an Entirely Wild Trade
Another factor that’s peculiar about the $55 call options is how intensely risky the narrative is. When GM stock closed on July 1, the market priced the security at $32.19. For the contract to be in the money, bullish traders must see shares hit fairly near their 2022 high. That is quite a tall order.
Nevertheless, market makers are not providing any deals for GM stock, perhaps because a real possibility exists that General Motors shares could start swinging higher. It comes down to the trajectory of its volatility.
- Trailing six-month performance: -51%
- Trailing one-month performance: -14.9%
- Trailing one-week performance: -8.2%
- Trailing 24-hour performance (July 1): +1.4%
Given how a mere dead-cat bounce could lift shares for no rational reason, it’s too risky for market makers to assume that GM stock will continue its downward trajectory, especially into March of next year. As well, fundamental factors come into the picture.
As The Wall Street Journal pointed out in May of this year, the average age of vehicles on U.S. roadways hit a record 12.2 years. Unfortunately for consumers, the reality of car ownership is that eventually, it might make more sense for owners to outright replace their vehicles with newer rides than to repair them.
Further, cars older than 12 years are surely out of warranty. Again, this dynamic forces consumers to make difficult choices, which may cynically benefit GM stock.
A Possible Investment Opportunity
To be completely upfront, should the global economy suffer a catastrophe like the Great Recession, all bets may be off for GM stock or any other consumer-dependent business. Even companies that are largely resilient against recessions (such as utilities) may still suffer volatility from the shock. Therefore, betting on GM will not be an easy activity.
Nevertheless, it’s encouraging that traders do see a speculative opportunity in the automotive sector. Further, the cynical implication – old cars needing replacement – bodes well not only for GM stock but for the broader automotive sector. If you have the stomach for choppiness, GM might be worth looking into.
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